Global Conservative portfolio outlook, positioning, and attribution as of 03/31/2023

March 31, 2023

Outlook

• We see continued risk of slowing economic activity tied, in part, to the Fed’s aggressive monetary tightening, and elevated stress in the U.S. financial system resulting, in part, from aggressive monetary policy has exacerbated the late-cycle challenges to growth.
• While headline data for some areas of the global economy remain sound, such as the U.S. employment and consumption, leading areas of the job market and reduced consumer savings suggest to us that the full impact of the Fed’s rate hiking cycle has yet to be felt.
• We expect earnings growth to vary significantly across U.S. sectors in 2023, as is typical when risk of recession is elevated, and we believe sector allocation will be key to investment outcomes in the coming quarters.
• Internationally, as global economic growth slows, we believe Europe still faces significant risks from monetary and fiscal tightening with a lower savings cushion to support consumers, and we expect slowing growth to present headwinds for economically cyclical emerging markets, while we see developed Asia as a relative bright spot.
• While risks to equities have increased, risks to fixed income have diminished, in our view, following the sharp rise in interest rates last year, as slowing economic growth and a likely easing of inflation should reduce upward pressure on intermediate and longer-term interest rates, and a Fed-induced slowdown could ultimately push down longer-term interest rates.

Portfolio Positioning

• We are avoiding early-phase cyclical U.S. sectors and, instead, are emphasizing sectors that we expect will see less deceleration in earnings and less margin degradation as economic growth slows.
• We have continued to add to late-phase U.S. sector exposure, with overweights of Health Care, Consumer Staples, and Utilities.
• We maintain allocations to the U.S. Information Technology and Communication Services sectors, which we believe are attractive at this stage of the cycle given their lower revenue volatility and more secular-oriented growth profiles versus more cyclical sectors.
• We remain underweight to international equities, as a whole, including underweights of Europe and emerging markets, but we maintain an overweight of developed Asia, where we see the greatest potential for economic resilience abroad.
• Seeing reduced risk to fixed income returns, and late economic cycle risks to equities, we have increased our overweight of fixed income and, within fixed income, we are emphasizing longer-term securities that should benefit from declining long-term interest rates, and we have increased Treasury exposure over the past year, which we believe could benefit amid a flight to perceived safe assets.

Q1 Attribution